In Reckoning a Law's Cost, Final Score Unclear

by Carl Bialik

Wall Street Journal
June 28, 2013

The official scorers of federal legislation gave backers of a sweeping immigration bill major support with the recent finding that the proposed law would cut the deficit and boost the economy. The Senate voted Thursday to approve the legislation, 68-32, with the House of Representatives still to vote on it.

But to some critics and even some supporters of the bill, as well as independent economists and policy analysts, the precise forecasts made by the Congressional Budget Office of the bill's fiscal and economic impact are fresh signs that the agency projects too much confidence. A little humility could go a long way toward boosting its credibility, they say.

For example, the CBO says that in 10 years, the immigration bill—which is expected to expand the flow of immigrants into the country and provide a path to citizenship for those who have already come illegally—would, if enacted, lift gross domestic product by 3.3% in a decade and by 5.4% in two decades. Allowing for wiggle room, though, the CBO says the 20-year boost may be as small as 5.1% or as big as 5.7%.

"The actual effects could be well outside CBO's ranges," the report said. But the agency doesn't say by how much. And for other numbers, such as the effect on the federal deficit, it doesn't provide any range.

That modest admission of potential fallibility doesn't come close to reflecting the true uncertainty of long-run economic forecasts, economists say. Even the CBO's one-year and five-year estimates for the budget surplus or deficit are frequently inaccurate. Yet the CBO's immigration numbers were cited in many media reports as certain predictions.

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How Do Societies Avoid Collapse?

Property & Environment Research Center
June 7, 2013

Economic research has long been subject to a pitfall: it lacks a laboratory in which to carry out simple experiments. Unlike sciences such as physics or chemistry, economic data are messy, imperfectly measured, and affected by any number of unknown variables. This makes it difficult to understand how humans and markets actually work.

The field of experimental economics attempts to address these challenges. Using controlled laboratory experiments and computer programs, researchers are able to take a more scientific approach to understand human behavior, and they are often uncovering new revelations about the way human societies work. Long-time friend of PERC and former board member Vernon Smith won the 2002 Nobel Prize in economics for his experimental economics research, which sought to go beyond mathematical abstractions and understand the role human institutions play in creating social rules and order.

Bart Wilson is a colleague and coauthor of Vernon Smith at the Economic Science Institute at Chapman University and a 2013 PERC Lone Mountain Fellow. This week, Bart visited PERC to explore how societies form rules and order. He even tested a laboratory experiment on the PERC staff to further demonstrate how human institutions emerge and how those institutions respond to sudden and dramatic changes. The experiment reveals something about how societies avoid collapse.

Here’s how it worked: Each PERC participant was provided a laptop and given instructions on how to navigate a virtual world resembling early human agricultural settlements. Players must harvest renewable resources—either green or yellow patches—to maintain a health rating. Each colored patch has a numerical value. The more health earned throughout the game, the more reward paid at the end of the experiment. The game is divided into “weeks” in which players can harvest and consume one resource per week.

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The Economic Sense in Game of Thrones

by Matt McCaffrey and Carmen Dorobăț

Mises Daily
June 7, 2013

[Editor's Note: This article is spoiler-free.]

The popular HBO series Game of Thrones is ending its third season this Sunday, amid fan concerns over its rapidly dwindling cast of characters. The show is based on George R.R. Martin’s intricate fantasy series, A Song of Ice and Fire, which has become an inspiration for commentary of all stripes. And while its complex and morally ambiguous characters have attracted many political and literary analysts, there are important economic lessons to be learned from the books as well.

Martin’s story touches on a variety of economic issues, from the implications of not having an economic system at all, to the problems of money and public finance. In another article (and in an interview), we have discussed these latter problems, and explained how the rulers of the continent of Westeros resort to the traditional methods of public finance: taxation, borrowing, and inflation.

The Political and Economic Means

In this article we will be discussing some of the other economic implications of the series, especially ideas about the social order and the role that peaceful cooperation, trade, and money play in the organization of society. Franz Oppenheimer famously distinguished between the “political means” and the “economic means” of organizing society. The former involves the forcible redistribution of wealth; wealth, however, is only created by those involved in the economic means of organization, which consists of peaceful production, trade, and exchange (1926, pp. 24-27).

This distinction shines through quite clearly in A Song of Ice and Fire. For instance, peoples as different as the Dothraki and the ironmen are stark examples (no pun intended) of the political means. Both societies produce little or nothing of their own, instead thriving on violence and plunder. A perfect illustration is found in the “words” (motto) of House Greyjoy, which proclaim, “We Do Not Sow.” The implication of course is that the men of the Iron Islands only reap the fruits of what others have sown.[1] The Greyjoy words are a very apt description of the state, which is a fundamentally parasitic institution depending for its survival on the plundering of a productive populace.

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Why Turkey is Rebelling

by Sebnem Kalemli-Ozcan

Project Syndicate
June 4, 2013

Turkey’s economy has been booming for a decade, earning praise not only from financial markets, but also from development economists like Jeffrey Sachs. Why, then, have peaceful demonstrations that began in Istanbul’s landmark Taksim Square turned into a nationwide protest movement, with hundreds of thousands of people taking to the streets in opposition to Prime Minister Recep Tayyip Erdoğan’s government?

Sachs, and others, have rightly acknowledged and praised the Erdoğan government for its economic policies, which have led to a higher growth rate. But the question is whether a developing country like Turkey can sustain rapid economic growth if the same government is undermining basic liberties and impeding the advance of key institutions needed for long-term success.

The Erdoğan government’s brutal response to the protests highlights this dilemma. Initially, fewer than 200 peaceful demonstrators gathered in an effort to protect Taksim Square – the last green space left in central Istanbul – against the construction of yet another shopping mall. As the government cracked down, with Erdoğan adopting an uncompromising position in defiant speeches, the protests grew – and continue to grow, despite (or perhaps because of) the use of excessive police force. Unofficial figures indicate that more than 1,000 people have been injured so far, and more than 1,000 have been arrested.

True, Turkey’s annual GDP growth has averaged 5% over the last decade of rule by Erdoğan’s Justice and Development Party (AKP). But this should not lead anyone to conclude that Turkey is a development success story. If we have learned anything from the extensive research on growth and development that now exists, the key to sustainable progress lies in a country’s institutional design.

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